Decisions on Bank Applications
Chase Manhattan Bank Delaware
FEDERAL DEPOSIT INSURANCE CORPORATION
IN RE: Chase Manhattan Bank Delaware Wilmington, Delaware
Application Pursuant to Section 24 of the Federal Deposit Insurance Act for Consent to Engage as Principal Through Wholly-Owned Subsidiaries in Fixed-rate Annuities Underwriting Activities That May Not Be Permissible for a Subsidiary of a National Bank
Pursuant to the provisions of section 24 of the Federal Deposit Insurance ("FDI") Act, Chase Manhattan Bank Delaware, Wilmington, New Castle County, Delaware (the "Bank"), has filed an application with the Federal Deposit Insurance Corporation ("FDIC"). The Bank requests the FDIC's consent to engage in fixed rate annuities underwriting including reinsuring activities indirectly through two wholly-owned subsidiaries (defined collectively as the "Subsidiaries"). The Bank intends to engage in the underwriting of fixed rate annuities and to participate in the underwriting of fixed rate annuities by reinsuring a portion of the fixed rate annuity contracts underwritten by other companies. In addition, the Bank intends to acquire a state-licensed company to underwrite and reinsure fixed rate annuities in states other than New York.
The activity of underwriting fixed rate annuities may not be a permissible activity for a national bank or a subsidiary of a national bank. State chartered, FDIC-insured banks may not engage as principal in an activity prohibited to nationally chartered banks unless they obtain consent from the FDIC. Consent may not be granted unless the bank is in compliance with applicable capital standards and the FDIC determines that the activity poses no significant risk to the deposit insurance fund. Delaware State law empowers state banks to form subsidiaries to underwrite fixed rate annuities.
The bank has not engaged in this fixed rate annuity underwriting activity directly, but it has the financial resources and expertise in its own right as well as through its relationship with the Chase Manhattan organization to successfully engage in this activity. Through its existing insurance subsidiaries, the Bank has developed many of the competencies necessary to support the activities proposed in the application. It currently has wholly-owned subsidiaries authorized to operate as insurers. Although none of these subsidiaries currently engage in annuities underwriting, one of the subsidiaries engages in the sale of fixed and variable rate annuities.
Fixed rate annuity underwriting can be characterized as an activity involving investment risk and actuarial risk. The investment risk present in fixed rate annuity underwriting relates to the use to which a bank's subsidiary, as underwriter, places the funds it collects, and is similar to the market risk present in traditional deposit taking activities in which a bank may "risk" a customer's funds by making loans or buying securities. The actuarial risk present in fixed rate annuity underwriting relates to the possibility that a bank's subsidiary, as underwriter, may have to pay out more than the book value of an annuity contract if an annuitant's remaining lifetime is underestimated. Such risks can be properly controlled by prudent risk management and use of conservative actuarial estimates. However, while such activity is not totally dissimilar to traditional deposit taking, there are the distinct differences identified above. Notably, one similarity to deposit taking is the many customers involved and the trust that these individuals place in the insurance company to repay invested funds. This aspect requires the strictest of separations and disclosures. In determining if a significant risk to the fund exists in this specific proposal, the FDIC evaluated the specifics of the Bank's application.
In evaluating this application, the FDIC considered the type of activity proposed to determine if the activity is suitable for a subsidiary of an insured depository institution. The proposed subsidiary structure and its management policies and practices were reviewed to determine if the Bank is adequately protected from potential liability. Capital adequacy was analyzed to ensure that the Bank first devotes sufficient capital to its more traditional banking activities.
The Subsidiaries are to operate independently of the Bank and meet the requirements of an "eligible subsidiary". Both of the Subsidiaries will be required to maintain separate recordkeeping, boards of directors, and operating management. The FDIC believes that requiring that the Subsidiaries operate as "eligible subsidiaries" best serves to delineate banking activities from fixed rate annuity underwriting activities and that such a condition protects both the Bank and the Bank Insurance Fund from unnecessary risk.
As of December 31, 1997, the Bank was in compliance with applicable capital standards, being considered "well capitalized" for purposes of Prompt Corrective Action. In order to ensure the Bank's capital remains sufficient to support both traditional banking activities and fixed rate annuity underwriting activities, a capital condition is imposed. The FDIC will require that the Bank's capital, after deducting its aggregate investment in and extensions of credit to the subsidiaries engaged in underwriting, equal or exceed the level required for a "well capitalized" institution pursuant to section 325.103(b)(1) of the FDIC's Rules and Regulations.
In addition, in order to promote the concept that annuities underwriting activities should be conducted in a separately and adequately capitalized subsidiary and to ensure that the appropriate insurance fund is adequately compensated for, and sufficiently protected from, additional risk in the event that Bank's capital levels fall well below "well capitalized" levels, the Bank's capital category for purposes of Prompt Corrective Action will be determined, and its risk adjusted deposit insurance premium will be assessed, based on the Bank's capital ratios after deducting all equity investment in the Subsidiaries, inclusive of any earnings made by and retained in the Subsidiaries, as well as any investment in any other subsidiary that is required by an Order of the Board of Directors of the FDIC to be deducted from the Bank's capital, exceptthat such deductions shall not be made when determining whether the Bank is "critically undercapitalized" as defined under Part 325 of the FDIC's Rules and Regulations.
The Bank's proposed investment in the Subsidiaries represented a substantial portion of its December 31, 1997, Tier 1 capital. The FDIC has chosen in this instance to rely, in part, on the limits imposed by Delaware state law to assure that an undue amount of the Bank's capital funds are not committed to this activity. The FDIC recognizes that it is generally beneficial for a subsidiary to borrow from its parent bank. However, given the Bank's substantial existing investment in the Subsidiaries relating to fixed rate annuity underwriting activities, as well as the potential that insured funds could be loaned to the Subsidiaries, the FDIC believes such restrictions are necessary to protect the Bank and the deposit insurance fund.
The FDIC has concluded that subject to certain qualifications that acquisition of insurance company licenses in order to facilitate the entry into the fixed rate annuity activity does not constitute engaging in life insurance underwriting. To assure that this restriction is observed the FDIC has required that if an insurance company is acquired, neither the Bank nor the acquired company will engage in the underwriting of insurance policies not permissible for a national bank or derive income from or share in the premiums of any such policies issued before the company was acquired by the Bank. If an insurance company is acquired, neither the Bank nor the acquired company will issue any new policies of insurance not permissible for a national bank or receive any additional net premium income from its existing policies. In addition, the acquired insurance wherever legally and practically possible, shall undertake to accomplish a novation of the inherited policies as soon as practical in order to extinguish possible liability to the subsidiary and the Bank.
For the reasons outlined above, including the imposition of conditions, the Board of Directors of the FDIC has concluded that the proposed indirect continuation of fixed rate annuity underwriting activities does not pose a significant risk to the Bank Insurance Fund, provided certain conditions are observed, and therefore, approval of the application, subject to the conditions in the ORDER, is warranted.
THE BOARD OF DIRECTORS
FEDERAL DEPOSIT INSURANCE CORPORATION